Should Argentina Be Welcomed Back by the Capital Markets?

Abstract

The question of whether financial intermediaries and institutional investors in the U.S. and Europe should welcome Argentina back to the global capital markets is certainly relevant -- especially for those with short memories who may be tempted by the high yields on offer to rush in without a full understanding of the significant risks involved. At first sight, it would appear that Argentina has come a long way from its troubled past. However, it would be naïve to rush to the conclusion that Argentina is a creditworthy or relatively safe place in which to invest. To begin with, under both the late Néstor Kirchner and the current President Fernández-Kirchner, the government has spent its enormous revenue windfall, such that in fact there are hardly any extra fiscal resources available to support the existing –- or any new –- public indebtedness. Serious allegations have been made about the accuracy and integrity of official inflation data in Argentina, casting doubt on all kinds of economic indicators that use price indexes as a deflator. If inflation has indeed been running closer to 25% than to 10%, then the government's fiscal, monetary and exchange-rate policies are unsound and destabilizing. Moreover, key institutions of relevance to investors have been undermined by government actions, such as the national statistical agency (INDEC), the central bank, and the country's pension funds. The controversy over the true rate of inflation is part of a larger picture of lack of transparency in Argentina. The country is the only member of the G-20, and one of the very few in the world, that refuses to abide by its treaty obligations to the IMF, which include allowing the Fund to inspect its books and evaluate the country’s economic performance and policies -– especially its exchange-rate policies under the IMF's Article IV Consultation process. Argentina is also the only G-20 member government that is in default on its loan obligations to its fellow members -– and it has been in default to them for nearly a decade. An eventual restructuring of these debts by the Paris Club will likely force today's investors to have their own bonds restructured as well, given the Club’s principle of "comparable treatment." The country is the G-20 member with by far the most U.S. court judgments against it and the most investor claims and arbitral awards against it at ICSID, the world’s premier dispute-resolution center. Argentina is likewise the only G-20 member that has been put on probation by the Financial Action Task Force (FATF), an inter-governmental body whose purpose is the development and promotion of policies, both at national and international levels, to combat money laundering and terrorist financing. Many allegations of corruption have been made but never investigated, and the FATF highlights the impunity that prevails in Argentina. In sum, despite the allure of high yields, investors and financial intermediaries are well advised to approach Argentine fixed-income and equity investment and trading opportunities with extreme caution, because they embody substantial market and default risks.